Is the BT share price the ISA bargain of the year?

Would it surprise you to know that the UK's ISA millionaires don't tend to go for high-risk growth darlings, or new biotechnology start-ups? And that they don't choose sectors that you need serious expertise to understand? No, the favourites of the millionaires are all big and stable FTSE 100 companies paying decent annual dividends, like BP and Lloyds

And I'm wondering if BT Group(LSE: BT.A) could be a nice ISA candidate too, especially as the share price has fallen so far. Over the past 12 months, the BT share price has fallen by around 30%, and it's down nearly 50% over five years.

There are good reasons for the drop, and I've been wary of the shares myself. But the death of BT has been prematurely rumoured a good many times now, yet the telecoms giant keeps on making profits and handing out fat dividends.

Estimates for the size of its pension fund deficit vary, though according to BT at Q3 results time, it stood at £7.9bn at 31 December under IAS 19 rules. That was up over the quarter, but down over the previous December. We'll know more when the triennial valuation is completed in the first half of 2018. The pension fund deficit is still a major issue, but I don't see it as the killer it's been made out to be.

Debt

BT's debt has ballooned in recent years as the company paid hefty sums to acquire the rights to a chunk of Premiership football. At the end of 2017, net debt stood at £8.9bn, which will surely bring water to a few eyes. That exceeds annualised adjusted EBITDA of £7.2bn (extrapolated from the nine months to December), but only by a factor of around 1.2 times, and that's a level that's usually considered manageable.

I do think the acquisition of those footy rights was a good move for BT, though it's arguable the company overpaid for them. And BT is moving further into the content provision business, having made a deal with Sky to offer some of its premium sport and entertainment content on the BT TV platform.

BT Openreach, the company's superfast fibre broadband offering, now reaches 27.4m UK premises, with the firm reporting a record high of 600,000 connections in its third quarter update. And average BT Sport viewing figures were up 23% on the same point last year.

Reported revenue was down for the quarter, by 3%, with adjusted EBITDA down 2%. But net cash inflow was up slightly, and BT confirmed that its full-year outlook is unchanged. But what does that suggest?

Valuation

Analysts are expecting earnings per share to drop 6% this year (with results due on 10 May), and that would drop BT's forward P/E multiple as low as 8 -- with modest predicted EPS rises for the next two years lowering it to just 7.7. With BT's debt and pension deficit problems, I'd expect a P/E lower than the FTSE 100's long-term average of around 14, but I see that as too low.

BT's dividends are now expected to yield 7% and better, and while there's a risk they might be reduced depending on funding needed for the pension deficit, they're decently covered by earnings.

Overall, I'm torn, but BT could be a decent ISA addition with a 10-year and longer outlook.

Buy-And-Hold Investing

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended BP and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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